2025 Guide: Inherited Retirement Plan Distribution Rules & Tax Implications
Learn the essential rules for distributing inherited retirement plan assets in 2025, including options for spouses, non-spouse beneficiaries, and tax considerations to maximize your inheritance.
Inheriting a retirement plan can be overwhelming, but understanding your distribution options is crucial to making informed decisions.
If you've recently inherited retirement assets, you might wonder about your choices: Can you withdraw the funds immediately? Is rolling over to your own IRA possible? The answers depend on several factors, including when the original account owner passed away, who the beneficiary is, and the beneficiary's age relative to the deceased.
This comprehensive guide breaks down the distribution rules for inherited retirement plans, helping you navigate your options confidently.
Key Insights
- Distribution requirements vary based on the deceased’s required beginning date (RBD) and beneficiary type.
- Spouses as sole beneficiaries have distinct rules, including options to stretch distributions over their lifetime or roll assets into their own IRA.
- Non-spouse beneficiaries generally must distribute assets within 10 years, with some exceptions.
- Nonperson beneficiaries like estates or charities face different distribution deadlines.
Death Before the Required Beginning Date (RBD)
If the original account holder dies before reaching the RBD—the age when distributions must start—the beneficiary’s options depend on their relationship to the participant and whether they are the sole beneficiary.
Spouse as Sole Beneficiary
A surviving spouse can choose to withdraw the entire balance immediately or take required minimum distributions (RMDs) based on their life expectancy. Post-death distributions must begin by the later of the year following the participant’s death or the year the participant would have turned 73 or 75, following the SECURE Act 2.0 updates.
Previously, RMDs started at 70½, increased to 72 with the 2019 SECURE Act, and now begin at 73 or 75 depending on birth year due to SECURE 2.0 (2022).
Life expectancy calculations use the IRS Single Life Expectancy Table (IRS Publication 590-B), recalculated annually for accurate RMDs.
Spouses can also roll inherited assets into their own IRA, offering flexibility in managing distributions.
Non-Spouse or Multiple Beneficiaries
Non-spouse beneficiaries must generally fully distribute inherited assets within 10 years, as mandated by the SECURE Act. Exceptions include disabled individuals and minor children, though minors must comply with the 10-year rule once they reach adulthood.
Nonperson Beneficiaries (Estates, Charities)
If the beneficiary is a nonperson entity, the entire account balance must be distributed by December 31 of the fifth year following the participant’s death.
Death After the Required Beginning Date
When the participant dies after starting RMDs, distribution rules change.
Spouse as Sole Beneficiary
The surviving spouse must distribute assets over the longer of their own life expectancy or the deceased’s remaining life expectancy. Life expectancy is recalculated annually if based on the spouse, or reduced by one each year if based on the deceased.
For example, if a participant dies at 80 and the spouse is 75, the spouse uses their longer life expectancy for distributions.
Non-Spouse and Multiple Beneficiaries
Non-spouse beneficiaries must distribute the account within 10 years after the participant’s death, eliminating prior lifetime distribution options.
Nonperson Beneficiaries
Nonperson beneficiaries must also distribute assets within 10 years.
Roth IRA Inheritance Rules
Roth IRAs do not have RMDs during the owner’s lifetime, but beneficiaries must follow post-death distribution rules similar to traditional IRAs if the owner dies before the RBD.
Plan-Specific Distribution Provisions
Keep in mind, some retirement plans may impose stricter distribution timelines than IRS rules. Always verify with your plan administrator to understand your specific options.
Tax Implications for Beneficiaries
Beneficiaries generally pay income tax on distributions from inherited traditional IRAs. Roth IRA inheritances are usually tax-free since contributions were made with after-tax dollars.
Steps to Take If You’ve Inherited an IRA
Spouses should consider transferring the inherited IRA into their own name or rolling it into an existing IRA or qualified plan to optimize tax treatment and distribution flexibility.
Understanding the 10-Year Rule
The 10-year rule requires most beneficiaries to fully withdraw inherited IRA assets within 10 years, except for certain eligible designated beneficiaries.
Final Thoughts
Inheriting a retirement plan involves complex rules and deadlines. To avoid penalties and maximize benefits, familiarize yourself with distribution requirements or consult a financial advisor or tax professional tailored to your situation.
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